Asset Classes Unlikely to Decouple From the Dollar Dynamic

by: Economic Disconnect

How Much Room to Run?
I have been looking at markets quite a bit as of late and wanted to touch upon a dynamic that should be coming into play fairly soon.

By now most are aware that huge runs in equities, metals, and commodities have been reflected in a weakening dollar. The QE 2.0 talk that started this summer initiated a meltdown in the buck and assets soared. It may be helpful to take a look at where we are. Here is a dollar index chart going back to 2008 [click to enlarge]:

  • It should be readily apparent what we are looking at:
  • the March 2009 lows in stocks were a top in the dollar
  • the dollar was smashed during the run up in asset prices
  • the buck was King Kong again at the height of the Euro concerns and the summer slowdown
  • QE 2.0 hopes have taken the dollar down once again

That's nice, but what does it mean?

Looking at the charts, the dollar has found a continual bottom around 74, and maybe has touched 72 a few times over the years. I have seen discussions about the dollar breaking down under 70 and what that may mean. While I have little doubt the Fed could lose control, I just do not see it happening. 74 or 72 will hold and by then the Euro mess may come back to the front pages.

Recent history has shown that a stronger dollar will be bad for stocks and most everything else. We are sitting at about 77 right now, so another 5% move can be expected to the downside for the dollar. This may not correlate to a 5% upside in other assets, it may well be more than that. What I am trying to show here is that the upside will be limited going forward. Unless.....

Asset classes decouple from the dollar dynamic that has been in play for some time. This is not impossible but I do find it unlikely. Still, this is something I am watching right now and will make plans accordingly. You will want to be watching at the 72-74 range for the dollar if a shift occurs. Many trades right now are very crowded and upon a reversal the exits could be jammed.

I am Not an Alarmist
My long held vision that the world will be overrun with robots is not new, yet I am sure we have never been as close as we are now! Take a look at this wishful thinking from long ago: News Article from 80 Years Ago Warns of the Impending Robot Age
Here is the scary vision from way back:

I think this was a bit premature. Now, not so much!